CCI's Rs 2544 Cr Order Against 14 Auto Companies!

Published on Sat, Aug 30,2014 | 14:44, Updated at Sat, Aug 30 at 14:44Source : CNBC-TV18 |   Watch Video :

14 car manufacturers and a Rs 2544 cr penalty! The Competition Commission of India has found them guilty of anti-competitive practices in the auto spare parts industry. Besides the impact on the business model of car manufacturers, the order lays down important precedents on contractual freedom and use of IPR by dominant entities. Payaswini Upadhyay gets you the how, why and what next.

Did it ever strike you that the only way to get a branded spare part for a Honda, Volkswagen or Fiat car is to go to an authorized dealer? Because an independent repairer may not have access to the branded spare part or the technical know-how pertinent to that brand?

One Shamsher Kataria in Delhi found this to be unfair and exorbitant. And so he complained to the Competition Commission of India that these 3 companies are restricting the availability of spare parts and after-sales services.

The CCI saw merit in the complaint and ordered an investigation not just against Honda, Volkswagen and Fiat but 11 other car giants.

This week the CCI found the 14 car companies guilty on two counts

- entering into anti-competitive agreements with their suppliers
- and abusing their dominant position

Balbir Singh
Partner, DSK Legal

"This is the first time that the CCI has gone to the extent of scrutinizing and giving an order on vertical agreements. This is a straight case where one player in one sector – the care manufacturer- has got direct control over the equipment manufacturers and they are ones who guiding whether sales should happen via service providers to the customers of the car manufacturers. This certainly gives a guidance to us the CCI in the future will be looking at these kind of contracts or combinations through vertical arrangements where one party is completely dependent on the other party and whether those kinds of agreements and conduct can be treated as anti-competitive."

In this case, the CCI concluded the agreements were in fact anti-competitive

The car companies argued that they sign agreements with suppliers to ensure quality and protect their goodwill. Some, among the 14 manufacturers, also argued that the competition law gives them protection against infringement and so if they are asking suppliers to seek prior consent before selling spare parts to third parties, the condition is a reasonable one.

The arguments didn't find favor with the regulator. The CCI noted that nothing prevents the car companies from ensuring their suppliers stick to the same standards of safety checks and use such labels on the spare parts that protect the brand image of the car manufacturer and limit liability. As for the IPR argument, the regulator concluded that since the owner of IPRs is the foreign parent, the exemption provided by law cannot be availed. The exemption is contained in Section 3(5) of the Act that allows agreements to protect intellectual property rights.

Vinod Dhall
Former Chairman, CCI

"The CCI says that the car companies have not been able to furnish evidence that in India, they have the protection of these rights and therefore they do not have the protection of Sec 3(5) of the Act. The second important thing on IPR which they have said is that Section 4 which is abuse of dominance – that Section gives no protection for IPR similar to Section 3 and therefore an abuse of dominance, which to my mind was the main argument of the CCI, that offers no protection and hence the argument was rejected on IPRs.  

Balbir Singh
Partner, DSK Legal

"Looking at the global jurisprudence, the CCI should certainly respect that anybody who is sitting our of India and especially in the light of the fact that the Act has got cross-border jurisdiction- therefore if someone has a right or protection under any other law in any other country that is also registerable under the Indian law – although not registered- those kind of right should be taken into account and that protection offered under those laws should also be taken cognizance of- that's what my take on the order is."

The CCI concluded that the agreements between car manufacturers and their suppliers restricted others from providing spare parts and the consumer has no option but to go to the authorized dealers. This led to a dominant position which was being abused by the car manufacturers.

A faulty engine, a broken drive shaft, a malfunctioning control unit- in any of tese situations, consumers would most likely feel forced to take the car back to the authorized dealer and pay the price determined by him.

And that got the competition regulator worried- the fact that the consumers gets locked in with car manufacturers for spare parts and services.  

To determine abuse of dominance, the CCI divided the market into two- the primary market i.e. manufacture and sale of passenger vehicles and two, the secondary or after-sales market i.e. spare parts and sale services. And said the secondary market is the relevant market. The companies argued that both should be combined to determine the relevant market.

The argument was rejected by the CCI. The regulator relied upon several US judgments and studies to conclude that consumers rarely take into account the cost of after sales services when buying a car. Manufacturers exploit this by selling cars cheap but charging exorbitantly for after sales services. For both to be considered as one market, buyers would have to know at the time of purchase what their after sales cost would be which they don't. And hence the after sales service market is a distinct market

Amitabh Kumar
Partner, JSA

"CCI has relied upon certain old empirical studies done by economists in 1970s and early 80s in the US and it has decided to use those conclusions in the Indian context. Now the Indian market and the US automobile markets are quite different. And so I am not sure whether that will squarely apply here and only on the basis on those empirical research, the claim of the auto manufacturers that it is a systems market has been rejected. It really remains a debatable issue and therefore be an opportunity for the car manufacturers to challenge this in the appellate Tribunal."  

Having determined the after sales services market as the distinct market, the CCI narrowed it further that after sales services market of each manufacturer is the relevant market. The manufacturer is dominant in that market because it's the sole supplier of spare parts and diagnostic tools.

This dominance, says the CCI, was then abused by one, denying market access to independent repairers; two, charging exorbitant price for spare parts from the consumers; three, leveraging the dominant position in the spare parts market to control the services market.

Balbir Singh
Partner, DSK Legal

"Interestingly while determining dominance, the CCI has said that dominance of one single car manufacturer is to be seen qua the product manufactured by them or qua the branded product sold by them. Now it is being said that they are dominant in respect with the branded components that they are selling in the Indian market- now that is a contradiction in itself. Now either the entire sales of spares and services is one market where all the players are participating or it can be said that the manufacturer specific component market is the relevant market. I am saying so because there cannot be a 10-12-15-20 dominant player in one market and if agree with what CCI has said while determining the abuse, I think all the car manufacturers become a dominant player in respect with their own component manufactured and sold in India besides the automobile itself. So I think that is the basic flaw."

After concluding abuse of dominant position, the CCI imposed a 2544 crore rupee penalty and several conditions on the manufacturers. For instance, make spare parts and diagnostic tools easily available, allow suppliers to sell spare parts in the open market without pricing and other restrictions, train independent repairers and not impede their operations; standardize parts to enable their use across brands; do away with conditions that result in cancelation of warranties etc.

Vinod Dhall
Former Chairman, CCI

"Some of these corrective measure are a direct consequence of what the CCI has said. CCI has said you cannot block the availability of spare parts in the open market; so it was natural to tell them look, the opposite of what you're doing it is to make available. The independent car repairers have been saying that the spare parts are not available to us, the diagnostic tools are not available to us and so we cannot offer service to a car owner and so it was natural for the CCI to tell them don't limit the availability of your diagnostic tools to just your authorized dealers but in a more broad way. And I think the CCI has drawn upon the corrective actions which have been taken in Europe and other places."

Amitabh Kumar
Partner, JSA

"I don't think a competition agency has the authority to actually, even in case of a dominant enterprise, direct how it should conduct its business. The intent is right but perhaps the directions that have been given to implement those intents seem to have gone a little too far as far as the competition agency's normal remit is concerned."

The other flaw that experts have pointed out in the CCI's order is the calculation of penalty. The COMPAT has laid down that the regulator should calculate penalty on relevant turnover and not total turnover. Even though the CCI has challenged this position in the Supreme Court, till such time it is overturned, experts say CCI cannot base its penalties on total turnover. The parties have 60 days to comply with the order and any immediate appeals would have to go to HC since as of now, the competition tribunal is non-functional.

Besides the principles of competition law, this order in landmark as it has potential to change the business models of car manufacturers and benefit consumers. If CCI prevails, consumers will have more outlets to buy spare parts and after sales services. Something similar played out in the EU where under Block Exemption Regulations, manufacturers are supposed to provide spare parts to independent operators. In the US, several States have introduced the Right to Repair Act to curb restrictive practices by automobile manufacturers. Perhaps it's time for manufacturers in India to go back to remodel their businesses.  

In Mumbai, Payaswini Upadhyay

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